KDI lowers economic projection to 2.4%

The state-run think tank downgraded its outlook on Korea’s economic growth for next year from 2.7 percent to 2.4 percent despite a 11 trillion won ($9.4 billion) supplementary budget approved in September to prop up the economy.

The outlook projected by the Korea Development Institute (KDI) on Wednesday is lower than the 3 percent projected by the Korean government and the 2.8 percent by the Bank of Korea (BOK). While global and local institutions are slashing their outlooks for the Korean economy one after another, the government has held its forecast at 3 percent.

The Organization of Economic Cooperation and Development lowered Korea’s outlook for 2017 0.4 percentage points to 2.6 percent last month.

In lowering its outlook, KDI cited weak exports and domestic consumption as the main factors.

“Construction investments have improved but other economic factors, such as domestic demand, facilities investments and exports, remain weak, and this suggests that the Korean economy remains sluggish,” KDI said in a report.

“Exports are likely to remain slow as global trade decreases and domestic consumption is also likely to drop as the real income growth rate is falling due to rising international crude oil prices. Labor markets will likely worsen as well due to the ongoing corporate restructuring and we expect the unemployment rate to rise next year.”

The KDI said it didn’t factor in changes that could come with the Trump administration and Korea’s corruption scandal.

“We didn’t include factors that might rise from the [Choi Soon-sil] political scandal in the next year as it is hard to predict at this moment how they will move on from now on,” said the KDI. “There are possibilities that the emerging market’s economies will fall due to the possible interest rate hike in the United States and rising sentiment of protectionism, and these factors are all likely to hurt the local economy. The Korean economy will also be affected if the Chinese economy slows faster than expected, since Korea’s exports are depended heavily on China.”

The year-on-year growth rate for domestic consumption is expected to fall from 2.7 percent this year to 2.3 percent next year while the growth rate for overall investments is likely to drop from 4.4 percent to 3.6 percent, according to the KDI. The report also projected that the unemployment rate will rise from 3.8 percent this year to 3.9 percent in 2017.

The KDI also expressed concerns that the ongoing political chaos will drag down domestic consumption and investments.

“Domestic consumption and investments, which are keys to the local economy, and other factors such as labor market and industrial outputs, might fall significantly if the political chaos lasts for quite some time,” the report said. “Expanding fiscal policies and lowering key interest rates are expected to help the next year’s economy.”

KDI projected the country’s inflation rate will remain in the 1 percent range next year, far below the government’s target range of 2 percent, and suggested the BOK further lower its key interest rate, already at a record-low 1.25 percent.

Deputy Prime Minister and Minister of Strategy and Finance Yoo Il-ho met Wednesday at the Central Government Complex in Seoul and expressed concerns about possible trade conflicts between the United States and China.

“We will try to reduce the negative impact coming from the possible changes and we are closely monitoring uncertainties that might rise from the recent referendum in Italy and the upcoming Federal Reserve’s meeting in the United States,” said Yoo.

“The Korean government will cooperate closely with the Chinese government to protect Korean companies doing business in and with China. We believe the strategic ties between Korea and China are very important to both countries and believe no factors should affect the relationship.”

The Chinese government recently banned Korean movies and dramas from appearing on the country’s state-run media, to show opposition to the decision to deploy a U.S. missile defense system in Korea. The Chinese government also launched a massive tax investigation and safety inspections into Lotte Group’s branches and offices in China last week.

Meanwhile, the nation’s exports improved in November, but this year’s exports remained weak. November exports grew 2.7 percent compared to a year ago to $37.5 billion, the first improvement in three months. This year’s trade volume, which includes exports and imports, reached $818.5 billion, and is likely to remain below $1 trillion this year as well. Trade volume and exports are likely to fall for a second year.

“There are uncertainties rising from the United States since it is still unclear how the Trump administration’s economic policies will be, but it appears that the idea of protectionism will grow,” KDI said.

Analysts had mixed views on whether Korea’s exports will improve due to the political chaos in the nation and the incoming U.S. administration, which could be more protectionist.

“One thing that is important for exports to grow is the amount of trade volume at this point. There also are pessimistic views that the possible interest hike in the United States will weaken the demand, and the global economy continues to be slow,” said Kim Jin-myung, an economist at Hi Investment & Securities.

Park Hyung-joong, an economist at Daishin Securities also argued that there are both positive and negative impacts from the incoming U.S. administration, an uncertain factor when it comes to Korea’s exports.

“Donald Trump has been saying that he will expand investments in the infrastructure sector, and I think this will work as a positive factor for Korea since local companies can participate in new projects in the United States,” said Park. “However, Trump’s possible protectionism policies will be a negative factor for Korea.”

BY KIM YOUNG-NAM [kim.youngnam@joongang.co.kr]